The nation's largest merchants have banded together against a
possible settlement over so-called swipe fees charged by credit
) . Last week, major U.S. retailers including
) officially opposed a multibillion-dollar offer from the credit
card companies to settle a 7-year-long dispute over credit card
in question could have long-lasting effects on MasterCard and
Visa if enough plaintiffs reject the proposed settlement deal.
However, perhaps more important is what this class action suit
means for consumers like you and me.
The not-so-secret truth
For many U.S. merchants, the cost of accepting plastic is a drain
on profits. That's because stores are forced to pay an
interchange fee to take credit cards, which can cost as much as
3% per transaction. Depending on how much business a merchant
generates, those fees can add up. In fact,
estimates that interchange charges account for about $50 billion
in annual revenue for the credit card companies.
If you're not yet concerned, you should be. You see, most
retailers pass this expense on to you (the consumer) by raising
merchandise prices. But here's the kicker: If a settlement is
reached in the case, that product markup will become a lot
pricier for shoppers paying with plastic.
In addition to the $6 billion Visa and MasterCard would pay to
settle the dispute, retailers would also gain the right to impose
a surcharge on each purchase
made with a credit card. To sweeten the deal for merchants, Visa
and MasterCard also agreed to cut transaction fees for eight
Put plainly, if you wanted to purchase a gallon of milk at
Wal-Mart, the discount retailer could charge you as much as 3%
more if you paid for that milk using a credit card. Not to
mention that if you keep a card balance at the end of each month,
you would also have to pay interest on that surcharge.
If you're curious why
Discover Financial Services
aren't getting mentioned in this controversy, it's because they
allow interchange fee surcharges, as long as the merchant also
imposes surcharges on payments made with other cards. Have you
ever wondered why some stores don't accept American Express? In
many cases, it's because they would have to charge customers more
to make it economical for them.
Prior to the proposed agreement from Visa and MasterCard,
consumers were generally protected by a no-surcharge rule. Yet
there's still hope, as Target and Wal-Mart, among others,
understand that this is a short-term remedy for a much larger
In a statement last month, Wal-Mart urged plaintiffs to refuse
the offer, saying, "As Walmart continues to seek reform that will
provide transparency and true competition among financial
institutions, we encourage all merchants to put consumers first
and reject the settlement."
Thanks or no thanks?
Before we praise Wal-Mart for defending "the consumer," there's
an important distinction to be made. Swipe fees exist for a
reason. For one thing, these processing charges help subsidize
the benefits we enjoy as cardholders. I can't speak for everyone,
but if you're like me, airline miles and points programs are
welcome perks to paying with plastic.
Unfortunately, these luxuries could disappear or at least be
significantly reduced if changes are made to the swipe fees paid
by merchants. Rest assured, credit card companies will find a way
to make up the difference. At the same time, if the settlement is
approved there will be long-term ramifications for both consumers
Personally, I think it is in consumers' best interest if the
retailers involved refuse the terms of the settlement.
Conversely, if they accept the terms and are paid the offered
amount, eight months from now merchants will once again be
pummeled with outrageous transaction fees -- only this time
they'll have no defense.
In an unsurprising twist, retailers are being proactive about the
move to mobile payment processing. It's my hope that
new payment services
such as those offered by
's(Nasdaq: EBAY) PayPal and upstart
will soon make allegations of price-fixing by credit card
conglomerates moot. In fact,
'(Nasdaq: SBUX) recent deal with Square will bring the tech
start-up's digital purchase platform to nearly 7,000 Starbucks
coffee shops around the country.
Similarly, PayPal is also gaining traction as more merchants
are choosing to test PayPal's point-of-sale systems in their
stores. Clearly, these offerings make more sense from an
investment standpoint considering most retailers are able to
utilize the technology free of charge. Bigger picture, increased
competition in the payments business should help redistribute
some of the pricing power currently held by credit card
While widespread adoption of mobile payments won't happen
overnight, we're certainly heading in the right direction. Going
forward, consumers should try to keep abreast of developments in
digital payments and the price-fixing tactics of credit card
companies. In the meantime, The Motley Fool has created a special
free report to help you navigate the tricky world of banking.
for instant access to your free copy of the research report:
"The Only Big Bank Built to Last." And don't forget to add
these stocks to MyWatchlist, the Fool's free tool that lets you
track and monitor your favorite stocks.
Fool contributor Tamara Rutter owns shares of Starbucks and
Target. Follow her on
, where she uses the handle
, for more Foolish insights and investing advice. The Motley
Fool owns shares of Starbucks.
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have recommended buying shares of eBay, Visa,
Starbucks, and Home Depot, as well as writing covered calls on
Starbucks and writing a covered strange position on American
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